Gold Owners Should Revisit Buffett’s Baseball Diamond

By Brendan Conway

It’s hardly a day to warninvestorsabouttheperilsofowninggold — the market is taking care of that. But Warren Buffett a while back put his finger on the reasons why owning gold is risky. It’s worth revisiting the argument amid the violent selloff.

In short: Gold not only doesn’t produce anything. But it will be much the same asset a century from now. Sounds great, say the gold bulls. Well, the feature leaves an investor unusually reliant on Other People’s Worries. It’s distinct from the risk-reward tradeoff seen in stocks and bonds, where a stable dividend or coupon payment or strong future earnings prospects can bring investors back. Just (1) your view of the macro economy and (2) your assessment of other people’s view on the same.

A little more than a year ago, you could buy all the gold in the world for just short of $10 trillion, goes Buffett’s thought experiment. The bullion is small enough to fit within a single baseball diamond, he wrote in the 2011 Berkshire Hathaway (BKRA, BKRB) investor letter, published in February 2012.

Or, for the same price, you could have all 400 million acres of farmland in the United States, plus 16 Exxon Mobils (XOM), the world’s most profitable company.

What would you choose?

Here’s the link to the full text, which is worth a read as gold futures drop more than 9% to $1,365, taking silver down 11% with it. SPDR Gold Trust(GLD)iand iShares Gold Trust (IAU) are down by more than 8% apiece, as is the closed-end Sprott Physical Gold Trust (PHYS). Central Fund of Canada (CEF) is down more than 9%. Market Vectors Gold Miners (GDX) is off 8.1% and Market Vectors Junior Gold Miners ETF (GDXJ) is down 11%. iShares Silver Trust (SLV) is falling 10%.

From Buffett:

Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.

Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.

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APRIL 15, 2013 2:57 P.M.

Wags wrote:

And it's a good time to remind you that without unprecedented bailouts with taxpayer money and a heavy dose of Fed inflation starting in 2008, you and Warren would both be in the poor house where you belong, instead of giving smug advice during a temporary pullback. Honest money will prevail.

APRIL 15, 2013 2:57 P.M.

ybf wrote:

At the moment (afternoon of 4/15/2013), gold is trading at $1364. That cube of gold (and when Buffett says it would fit "comfortably" within a baseball diamond, he means that if it were to be centered on the diamond its corners would be about 15 feet away from the bases) has dropped in value from $9.6 Trillion to $7.5 Trillion. So we've had to throw back a handful of Exxons already.

APRIL 15, 2013 3:22 P.M.

Crozetian wrote:

And when black gold from the ground is depleted and Exxon Mobil can't get anymore to sell, gold will still be ruling the roost as a shiny, valuable and even rarer commodity. By then, Buffett will be as dead and gone as his advice.

APRIL 15, 2013 3:49 P.M.

Anonymous wrote:

I agree the farmland is more valuable the point is do you pay for it in Monopoly money or something more tangible that has been an acceptable means of commerce for 3000 years,or unroll tricky Dick tried to change things.if you think today is volatile get ready for the day the dollar and the bond markets recon.

APRIL 15, 2013 7:07 P.M.

masculineffort wrote:

Gold is money mate! It's a way to protect your savings. Let's see where we could put our savings

1. Banks: At 0% interest. Hahaha

2. Stocks: They pay very little dividend while the insiders shaft everyone else. No thanks

3. Real estate: And pay huge property taxes and having to fight city hall over your home valuation? (which they routinely inflate to get more property tax)

Gold is a bad investment under an honest government. We do not have an honest Government. No body does. So Gold Rules Y'all!

APRIL 16, 2013 11:02 P.M.

rich wrote:

Brendan,

Can you cite any independent analysis or research to back Buiffet's claim about the value of all gold ever mined? Or you can cite Buffet's own research and supporting calculations?

How would anyone ever know with any accuracy the value of all gold ever mined. Think about it.

APRIL 17, 2013 1:32 P.M.

FrParlentFr wrote:

Gold is not a productive asset, we all know that. Is your dollar bill in your pocket a productive asset?
Here is the trick, if we had a fixed monetary regime, there is no way to bail-out imprudent entrepreneurs. In a fixed monetary regime we would have very painful deflation. Buffet gets float in fiat dollar which continuously lose purchasing power since 1933. So he ows something that always goes down in value and buys companies which have pricing power and reprice inflation. Now picture a XIX century style deflation. All of hte sudden price can plunge by 30% over 5 years. In that situation the Gold convertible he owes is very very hard and goes up relative to everything else (stocks, commodities, everything). Consumers who prudently saved gold buy things cheaper. But the capitalists see teh stocks he owns suck wind while he owes a hard currency (insurance float). Mr Buffet is an inflation profiteer.

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Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.